A CRITICAL ANALYSIS OF MCB-RBS DEAL
Aug 24 - 30, 2009
After posting the biggest loss in British corporate history last year, the Edinburgh-based Royal Bank of Scotland (RBS) had announced in February that it would sell or shut its all businesses except the Securities business across Asia. It had also announced to exit its wholesale banking businesses in Vietnam, the Philippines, Taiwan, and Pakistan in an effort to refocus the group's geographic reach across a smaller number of key markets.
RBS is 70 per cent owned by the state after a massive bailout from the British government last year amid the global financial crisis. RBS Pakistan ranks number fifth on the basis of customers but with the largest branch network in its Asia operations. With a branch network of over 75 in 24 cities, RBS is a leading international bank in the country having total assets of Rs108 billion as of Dec 31, 2008.
The RBS is presently seeking to raise capital, as it is selling or shutting businesses in two-thirds of the 54 countries in which it operates. This month, the MCB, Pakistan's largest bank in terms of market value, acquired 99.37 per cent shares of the RBS operations in the country under a $87 million deal. The shares of RBS got the lowest price as compared to previous deals made during the last six years in the country. The country's JS Bank Ltd. and Egypt's Orascom Telecom Holding SAE had also shown interest in acquiring the RBS Pakistan.
This month, the Australia & New Zealand (ANZ) Banking Group Ltd., Australia's fourth- biggest lender, agreed to buy RBS's units in six Asian countries including Singapore, Hong Kong, Taiwan, and Indonesia. Under the deal, ANZ Bank will pay $550 million for the assets.
In London, the RBS revealed on August 12 that it is to sell its Pakistan division to MCB Bank for $87 million, AFP reported. 'The Royal Bank of Scotland Group plc has reached agreement in principle for the sale of its 99.37 per cent holding in The Royal Bank of Scotland Limited (RBS Pakistan) to MCB Bank Limited (MCB) for a total consideration of $87 million,' the group said in a statement. 'We have successfully entered into a sale agreement with the MCB for RBS Pakistan which comprises Retail, Commercial, Islamic and onshore GBM (Global Banking and Markets) and GTS (Global Transaction Services) businesses in Pakistan,' said Mohammad Aurangzeb, chairman of RBS Pakistan.
As a result of the transaction, the total number of branches of combined MCB and acquired bank (RBS Pakistan) will increase to 1,139, the total consolidated deposits would increase to Rs413 billion and consolidated gross advances to Rs324 billion.
The acquisition will strengthen the franchise in key urban centers and broaden product offerings to retail and well as corporate customers, APP reported, citing MCB chairman Muhammad Mansha. MCB's advisors on this transaction were the Bank of America, Merrill Lynch and KASB Securities, while Morgan Stanley had advised RBS Group plc.
Though MCB has succeeded to strike the deal at the lowest price, yet the deal has come at a time when banking in the country is not in good shape while the global banking system is facing complicated problems which forced giant European and American banks to either seek government help to come out from the continued heavy losses or closed down their operations. In the last six years, the country has witnessed eight acquisitions of banks, with the biggest being Standard Chartered Plc's purchase of Union Bank Ltd. for $487 million in September 2006.
In December 2008, Pakistan had been ranked 5th in the world's banking efficiency index, while it stood among the top 25 countries in terms of foreign direct investment and foreign labor as per the world competitive report compiled by the World Economic Forum, Switzerland.
Last February, Fitch Ratings said that the Pakistani banking system has, over the last decade, gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system. The country's banks have historically enjoyed low cost of funds as a result of their large low cost deposit base resulting in some banks enjoying interest spreads of around 7.5 to 8.5 percent, Fitch noted.
Analysts believe that deal will allow MCB to significantly progress in its strategy of building a stronger share in key segments of the market. The acquisition would help the MCB tap growth in the country that witnessed a GDP growth of two percent in the last fiscal year, slowest in 10 years and is forecast to grow three percent in the current fiscal year ending next June.
Under the government of ex-premier Shaukat Aziz (a banker), liberalization of the financial sector enabled Pakistan to take advantage of global opportunities. Financial globalization in the country led to increase liquidity and lowered the cost of capital, thus leading to better allocation of financial resources and more productive investments. It had also spurred competition and led to a new age of financial sector development by improving screening of credit risks, monitoring of borrower activities, diversification of the financial portfolio and substantially increasing the outreach to the customers. Foreign financial institutions also brought about improvements in the system by bringing in highly diversified financial tools and best practices from the developed economies.
During the last five years, foreign banks substantially increased their share in the country's banking system. The estimated share of foreign banks in the banking industry had reached 13 per cent. In terms of assets, foreign investors possess about 42 per cent banking assets of the country. Barclays Bank of United Kingdom, the world's second largest bank, was the seventh foreign bank that started its operations in December 2007 in branch mode in the country.
MCB Bank posted a 1.7 per cent rise in net profit for the three months ending June 30. It earned 3.62 billion rupees ($43.7 million) in the second quarter of the calendar year 2009, compared with 3.56 billion rupees a year earlier. 'There were no surprises and the result was within expectations, as gains made by the banking sector as a whole were offset by higher provisioning for bad loans,' Reuters recently reported Farhan Rizvi, head of research at JS Global Capital Ltd as saying.